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January 12, 2010
Looking Forward at Deal Making in 2010
It is not that Private Equity (PE) does not have the impetus, due to $400B in dry powder waiting on the sidelines and returns on aging funds stunted from a slow 2009, but they will be in stiff competition with strategic buyers or corporates that are sitting on their own piles of cash. The advantage with strategic buyers is that they can pay higher premiums since they can gain greater synergies with the merger of the combined entity. PE firms often buy in isolation which necessitates a smaller premium to create a bigger upside return (there is an exception here when a PE firm creates a “platform” to where they roll up new acquisitions into a combined entity so PE can look like a strategic buyer in that specific scenario). Only in 2007, the height of the boom, did we see PE firms outbidding strategic buyers, but that is not likely to repeat itself with the current tighter leverage.
So where does that leave us? Strategics will be primed to complete many of the larger transactions (the E&Y report mentioned that only 145 deals in 2009 broke the $1B mark compared to 609 in 2007 so we will need to consider over $1B larger for the moment in this recovering market). PE, still needing to allocate capital, will grab more transactions into the mid-market, as opposed to a single larger investment, as well as picking up assets via divestitures. This points to total deal volume going up, but total deal value well below previous high marks This creates a conflict with the lender’s need for more stringent diligence (e.g. longer time to diligence) with the need to complete a higher volume of transactions. How this plays out, we are not sure yet. Another option is to push into eastern markets in an attempt to allocate larger capital positions (this unfortunately weakens western markets in the long run, but committed money can only wait so long) and firms like KKR and Carlyle (http://www.carlyle.com/Media%20Room/News%20Archive/2010/item10833.html) have already been making initial moves in the East. Regardless of using a crystal ball, magic 8-ball or a large study, 2010 will be busier than 2009 just from the simple fact that debt financing is finally starting to flow again and I am looking forward to that.
